Why use an axe when a scalpel will do? | IR News

Why use an axe when a scalpel will do?

Posted Date: 09/07/2012

By Jon Bird

In the never-ending 'Sale season' that is retail today, merchants have become used to chopping prices.

Thirty per cent off not getting the punters in? Whack! Let’s take it to 50 per cent off. Half price not doing it for you? Thwack! Now it’s 70 per cent off.

Intuitively, retailers know that an axe can be a pretty blunt instrument when it comes to prices. But now, there is an increasing body of evidence to support the view.

Many customers prefer the concept of “added value” to “money off”, according to a study by the University of Minnesota’s Carlson School of Management, as reported in a recent issue of The Economist. And part of the reason is that shoppers often don’t know the true value of a discount.

In one experiment, the researchers found that most shoppers assume “50 per cent more free” is a better deal than “33 per cent off”. In fact there is no difference in value.
“OK”, you say, “50 per cent is a bigger number than 33 per cent”. In another case though, students in one of the researcher’s classes compared two deals on loose coffee beans, and confidently calculated that “33 per cent extra free” is the same as “33 per cent off”. Fail! The saving is a much better offer.

Perhaps part of the magic of these examples lies in the power of the word “FREE!” In the best seller Predictably Irrational, author Dan Ariely devotes a chapter to the subject. “Have you ever stood in line for a very long time (too long) just to get a free cone of Ben & Jerry’s ice cream?” asks Ariely.

There are all kinds of ways in which retailers can add value to a sale. Apart from literally giving a customer more for their money (free product), you can consider the “Gift With Purchase” (GWP), or “Purchase With Purchase” (PWP). The trick here is that the GWP or PWP has to be desirable and feel like a real “score”, sometimes further heightened by the item being “limited edition”.

Of course, the most elegant way of all to add value is to seduce shoppers via great product, amazing presentation, or by delivering dazzling service.

Super Retail Group CEO Peter Birtles said at a recent ANRA lunch: “It’s our job as retailers to inspire our customers.” But sometimes, even the best merchants need just a little more to nudge shoppers across the line.

Adding value takes more thought and imagination than cutting prices, but it can prove more effective and provide a greater return. So which would you rather be? An axe man with a blunt blade, or a surgeon with a scalpel?

Jon Bird is CEO of specialist retail marketing agency IdeaWorks. Email Jon. Blog: www.newretailblog.com Twitter: @thetweetailer

Keywords: Jon Bird

Comments:

Tuesday, July 10, 2012 by agittins

I don't know if it's so much to do with the word "Free" but more that people don't understand fractions - like those who don't understand the difference between markup and margin. People internalise the "percentage more" option as the same as "percentage off" because they use the original quantity as the denominator in both offers.

Offer 1: 100 beans for $100. 30% off = $70 for 100 beans ($0.70 per bean)

Offer 2: 100 beans for $100. Get 30% more for free = $100 for 130 beans (~ $0.77 per bean).

Obviously for the retailer the latter is much better - higher margin AND higher dollar margin (ie, more money in your pocket).
Most people fail to realise that in the second offer they are buying 130 beans, not 100, and that (rather than the word "free") is what throws out their intuitive assessment. There could be some bias from "free" but it isn't the core of it, imo. The word "more" (at least in western cultures) probably has a bit to do with it too.

But the real gem is what it does to the customer's impression of your product (and by extension, your operation):
Customer from Offer 1 walks away saying "I got 100 beans cheap!". Customer who chooses offer 2 walks away saying "I got 130 beans for the price of 100!"

The first customer has "devalued" the beans - these are now "cheap beans" so they might not be as good as someone else's beans.

In the second case her beans were the same price as anyone else's beans (they are still premium beans) - she just scored more of them.

Seems like an excellent way to offer a lower price without devaluing your product (especially important for non-commodity items).

Leave your comment

CAPTCHA Validation

Code:

Name:
* Email:

Please note: all comments are subject to moderation for legal reasons and to prevent spam. We'll approve your comment as quickly as we can. If you don't see it appear you do not need to repost it.